Career Point University Hamirpur Vs CIT (ITAT Chandigarh)
Chandigarh ITAT: 12AB Registration Cannot Be Denied on Mere Suspicion of Related-Party Transactions Without Proper Factual Verification
The Chandigarh ITAT set aside the order of the CIT (Exemptions) rejecting the assessee-university’s application for registration under Section 12A(1)(ac)(ii), holding that registration cannot be denied on the basis of factual discrepancies and mere suspicion regarding related-party borrowings without first undertaking a proper factual verification. The matter was restored to the CIT(E) for de novo adjudication.
The CIT(E) had rejected the application primarily on two grounds. First, he computed unsecured loans of ₹29.68 lakh as on 31.03.2025, whereas the assessee’s financial statements reflected nil unsecured loans. Secondly, he held that the assessee had borrowed funds from a related concern at 10.5% interest, which allegedly indicated possible diversion of charitable funds and an arrangement not consistent with the principles governing charitable institutions.
The Tribunal found that the alleged discrepancy in unsecured loans was purely factual, observing that the difference apparently arose because the CIT(E) omitted to consider changes in current liabilities, a reconciliation which the assessee claimed it could satisfactorily explain.
On the issue of interest paid to the related party, the Tribunal held that mere payment of interest at 10.5% could not, by itself, justify denial of registration. Before concluding that the rate was excessive or indicative of diversion of funds, the CIT(E) was required to compare the interest with prevailing market rates, keeping in view that unsecured borrowings generally carry higher rates than secured loans, which are backed by security and may also involve separate processing charges.
Accordingly, the Tribunal set aside the rejection order and restored the application to the file of the CIT(E) for fresh adjudication after proper factual verification, directing the assessee to substantiate its case with the necessary evidence. The appeal was allowed for statistical purposes
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
1. Aggrieved by rejection of an application as filed by the assessee seeking registration u/s 12A(1)(ac)(ii) vide impugned order dated 17.03.2026 of Ld. Commissioner of Income Tax (Exemption), Chandigarh, [CIT(E)], the assessee is in further appeal before us.
2. Upon perusal of para 4.2 of impugned order, it could be seen that Ld. CIT(E) has worked out balance of unsecured loans as on 31.03.2025 at Rs.29.68 Lacs whereas the same has been shown to be Nil in assessee’s financial statements. The Ld. AR has contended that the same represent change in current liabilities which has been omitted to be considered by Ld. CIT(E) in the computations. The Ld. AR stated that the same could be reconciled by the assessee.
3. The second issue as raised by Ld. CIT(E) is that the assessee has paid interest of 10.5% to Srajan Capital Limited which was a related entity. It has been observed that the pattern of transaction indicate that funds were utilized on a need-based basis rather than as structured borrowing arrangement thereby raising concerns regarding the genuineness of such financial arrangement. The Ld. CIT(E) also alleged that such rate of interest was higher than rate of interest normally charged on unsecured loans. The assessee institution claimed it to be a public charitable institution engaged in educational activities. In such institutions, financial transactions with related parties require strict scrutiny to ensure that the funds of the institution are utilized solely for charitable purposes. In the present case, the borrowing of funds from related concerns at comparatively higher rates of interest coupled with frequent financial transactions raises the possibility of diversion of funds for the benefit of related parties, which is not consistent with the principles governing charitable institutions. Finally, the registration was denied against which the assessee is in further appeal before us.
4. So far as the issue of discrepancy in unsecured balance is concerned, we find that the same is factual in nature. Apparently, the difference as computed by Ld. CIT(E) represent change in current liabilities. The same would require re-appreciation by Ld. CIT(E).
5. So far as allegation of higher rate of interest is concerned, it is the argument of Ld. AR that it has to pay separate processing fees on secured loans and the secured loans are backed up by security which justify lower rate of interest in comparison to unsecured loans. The rate of 10.5% as paid by the assessee is, accordingly, contended to be fair and reasonable. We are of the opinion that the allegation has to be fact based. It is to be ascertained how the rate of interest as paid by the assessee is on the higher side having regard to the prevailing market practices. This exercise is to be undertaken before reaching a conclusion that the assessee has paid higher rate of interest to related parties.
6. Considering the facts and circumstances of the case, we set aside the impugned order and restore the impugned application for de novo adjudication on above lines by Ld. CIT(E) with a direction to the assessee to plead and prove its case forthwith.
7. The appeal stand allowed for statistical purposes.
Order pronounced on 5th August, 2026
